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Friday, July 22, 2011

Everyone suggests when to buy a Mutual Fund or what fund to buy. But, when to sell a fund is something that we don't usually get much advice on. As a general investor, it is possible that you are unclear about when to sell your fund holdings to make the most of your investment. The purpose of this article is to shed some light in this regard…

Why taking a Selling Decision is more difficult than the Buy Decision?

Buying a fund or suggesting a buy is pretty straightforward. There is not much complication in this part but, when you must sell the fund is something is very complicated. Why?
What if you sell a fund today and after 3 months, the fund NAV goes up by 50% and you lost out on this boom because you sold it at the wrong time…

Sounds pretty feasible isn’t it? This is exactly why taking a Sell Decision is more difficult than the Buy Decision.

Below are some general guidelines about when to sell your fund holdings…

Always keep a long term approach

One needs to understand the way a mutual fund works. Or at least the way it doesn’t: it is not a share where you buy and sell with the aim to make a profit that too in short term. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment objectives of the fund, and we as investors will enjoy the gains from this activity.

The point here is that, MF investments are not like shares which means that the NAV of the fund will not go up drastically just like a share might. So, the whole idea is that, MF investments can be beneficial only if you buy them with a long-term approach.

Don't Sell on an Impulse

The general investor public in India is extremely impulsive. A simple example is when the Tsunami in Japan triggered a correction in our stock markets. Practically speaking, the impact of the Tsunami on the day to day activities of company’s in India is negligible if not zero. But still, our people went into the usual panic mode and started selling. During such situations, it is better to hold off on the impulsive sell.

This might sound like bad advice, but the fact is that, you have a fund manager who is supposed to make the most of the market situations and make a profit for you. So, he would be in a position to make buy or sell calls at the opportune moment and make a profit for you. Such short term corrections are usually the best buying times for value stocks which might benefit us in the long term. And, if the fund manager is prudent enough to utilize such an opportunity, we will be getting good rewards in future which we must not miss out.

Sell only when you need the money

The purpose of any investment is to utilize the proceeds in future when you need the money. Lets say you want to surprise your wife with a surprise foreign vacation on the occasion of your marriage anniversary. You get an awesome deal from a travel agent at a huge discount and you don't want to miss the offer, you can go ahead and sell the fund and use the proceeds to surprise your wife. After all, we earn and save money to keep our loved ones happy.
But, let’s say you want to sell the fund just because you have been holding on to it for more than 2 or 3 years, it would be a bad idea. First of all, you are not in any urgent need of the money and secondly why sell when the fund is performing fine? Doesn't make sense, does it?

Always look out for external factors that might trigger an exit

There are numerous external factors that might trigger an exit from a fund. For example, recently the government of India has scrapped the tax benefit on investment in the ELSS mutual funds. So, it doesn't make any sense in staying invested after your 3 year lock-in period because not many people will continue to invest in the fund and the fund NAV might tank after a year or so. So it is best if we exit after our 3 year lock-in is complete.

Always look out for internal factors for an exit

This is yet another thing we must be on the lookout. For example, a fund manager who is a star performer switches ships and joins another asset management company. The new fund manager may or may not sustain the growth the star fund manager gave us in the past. In such situations we must not be prejudiced about the new fund manager and immediately exit but, we must wait for 3-6 months to see how the new fund manager performs. If the new guy isn’t able to keep up the momentum that the old fund manager had, then it is high time to exit. The 3-6 month wait time is to avoid losing out on profits just because you are unsure of the new guys performance. What if, he is better than the star fund manager? We wouldn't want to lose out on fat profits just because we were judgmental about the new guy. Or would we?

What is the Bottom Line?

Well, by now you may get anxious and ask me, where exactly I am going with this article. The bottom line is that, buying a Mutual Fund is not a one time activity. Though you may not have to track it closely as you would with a share, you need to keep your eyes and ears open and keep yourself updated with the funds performance atleast on a quarterly basis and ensure that you don't hold on to bad performing funds.

Wednesday, July 13, 2011

If you are a Salaried Employee of some company in India, by now you must have got your Form 16 from your employer. It is now time to file the return. Though many of you may know what the purpose of the Form 16 is and how to file the tax returns, not many of us know the details of what is present in the form 16 and how to understand the various contents of the form 16.

The purpose of this article is to explain the same so that, we can all understand what the Form 16 is and help us understand our financial status better.

Before we Begin: Details of Indian Income Tax, Sections under which you can save tax can all be found by “Clicking Here”. We have already covered it in great detail in one of our earlier posts.

What is this Form 16?

It is certificate issued by the employer to employee stating the details of income earned and the tax deducted on his behalf and paid to the government. Every employee who is subjected to TDS is supposed to receive their Form 16 from his/her employers. As per the government regulations, there are certain deadlines by which you must receive your Form 16 but in many cases employers don’t hand out the form 16’s on time. Nonetheless, as long as we get the form 16 at least a month before the tax-filing deadline, we must be good.

Point to be Remember:

• No Form 16 is required if TDS is not deducted from salary by your employer
• If TDS is deducted by banks to the pension holder, banks should also issue Form 16. For interest income the bank issues form 16A

Now that we know what the Form 16 is, let us go through the components of a Form 16.

The Components of a Typical Form 16 Document:

PAN

PAN stands for a Permanent Account Number which is a 10 digit alpha-numeric code generated by the Income Tax Department of India. The tax department has made it mandatory for everyone (including NRIs, PIOs & Companies) who wishes to conduct any type of investments and financial transactions in India. Carrying business, filing or paying taxes, investing in India, buying a property, opening a bank or demat account, etc. now require a PAN number. Since details of tax paid by individuals are all linked to their respective PAN Card Numbers, the PAN is the first and foremost information that can be found in any Form 16.

No Two Individuals will have the same PAN Number.

TAN

TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons/companies who are responsible for deducting or collecting tax. TAN numbers are also unique to companies. Just like the PAN Number, no two companies will have the same TAN Number.

Gross Salary

It refers to total of an employee’s regular remuneration including allowances, overtime pay, Commissions, and bonuses, and any other amounts that were paid by the company and most importantly before any deductions are made.

Perquisites

Perquisite is an additional benefit provided by the employer to the employee in addition to the salary or wages. Many of you may be aware of the term “Perk”. This is a more finance oriented term but it means the same as “Perks”

Ex: Free Accommodation, Loans at a Subsidized Rate etc.

Profits in lieu of Salary

Profit in Lieu of Salary is a part of the salary income, thus it is taxable under the head income from salary. It is any payment made to employees in lieu of salary.

This actually means any payment due to or received by employee from his employer or former employer at or in connection with the termination of employment or due to modification in terms and conditions relating thereto.

For example, Gratuity, Commuted value of pension, Retrenchment Compensation etc. received or due to be received to the extent which is not exempt, and which it does not consist of contribution made by the employee, or interest thereon will be taxable as profit in lieu of salary.

Allowance

Allowance is a payment made by employer to an employee to enable the employee to meet certain cost of expenditure incurred on behalf of the employer. This generally forms the part of the employee’s taxable income.

There are many different allowances that are part of an individual’s salary and will be covered in the Form 16. Some of them are:

Government encourages certain type of savings – mostly long term savings for your retirement – and therefore offers you tax breaks on such savings. These tax breaks are nothing but deductions allowed from the gross total income by means of Section 80C or 80DDB.

Surcharge

Surcharge has been abolished for Personal income tax in the financial year 2009-10. Though you may have seen this in your previous Form 16’s it will not be in this years or subsequent year Form 16’s.

Education Cess

Education cess is a contribution made towards the Secondary and Higher Education development in the economy. All taxes in India are subject to an education cess, which is 3% of the total tax payable.

Relief u/s 89

Relief is granted to individuals when salary is paid in arrears in a lump sum.
For example, Salary (received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation)

These were the most important components of a Form 16. You can go through your personal Form 16 and post comments on this post if you have any further questions!!!

Monday, July 11, 2011

Well, I am among the millions of Indians who are unhappy because of this news but nonetheless, we dont have a choice and the only thing we can do is, try to mould the situation in a way that we get the most out of it.

I had explained that the Income Tax department of India has made some changes to the Tax Return Filing policy which will be a good news for all of us. Unfortunately, I have to Apologize for talking too soon about it.

After a few weeks, we are starting to get more clarity on this development and now it looks like this Good News isnt so good after all...

What is the Problem here?

The Central Board of Direct Taxes (CBDT) had made millions of Indians smile by announcing that salaried taxpayers with an annual income of up to Rs 5 lakh need not file their returns. (Refer to my article mentioned in the previous paragraph) They won't have to spend time, effort and money in filing their tax returns.

The problem here is that, given all the conditions that govern if someone needs to file his/her returns or not, it looks unlikely that it would be of any real use to us. At the end of the day, if the conditions are going to ensure that everybody does file their returns like usual, whats the point of having this new ruling?

According to the Ruling by the CBDT, a salaried person is exempt from filing his return for the financial year 2010-11 if he fulfils the following conditions:

a) Income after allowable deductions is up to Rs 5 lakh.
b) Income is only from salary and savings bank interest
c) Salary is from one employer.
d) Savings bank interest is below 10,000.
e) Tax on bank interest is paid and included in Form 16

Let us analyze these points one by one.

a. Income after allowable deductions is up to Rs 5 lakh.

Fine - Fair Enough. Many of us will fall under this bucket.

b. Income is only from salary and savings bank interest

Problem - Anyone who is earning around 5 lakhs a year may have Bank Fixed Deposits, Share Market Investments, Mutual Fund Dividends, Rental Income etc. So, anyone who earns an income out of any of the two means (Salary & Savings Bank Interest) cant use this.

Even Investments made under section 80C like NSC, PPF or infrastructure bonds to claim deduction under Sec 80CCF are not considered. So, if you have done something to save tax in the past and earned an income out of it, you cannot use this.

Result - Atleast 65% of people are now out of the bucket.

c. Salary is from one employer only.

Problem - Anyone who switched jobs cant take advantage of this rule. Even if your income is below 5 lakhs, if you switched jobs, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

d. Savings bank interest is below 10,000.

Problem - Lets assume that I dont invest in any investment option like stocks or mutual funds or bank FDs and keep all my cash in my savings account. At the end of the year, I may earn an interest of more than Rs. 10,000/- and it is a very real possibility. Unless you are someone who spends every single rupee you earn, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

e. Tax on bank interest is paid and included in Form 16

Problem - Your employer will give a form 16 only for the salary he pays you. Why would he bother about clubbing your bank interest earned? Some employers ask for other income earned before they print out the form 16s for you. If you are that lucky bunch, you may get an interest paid certificate from your bank and give it to your company. Otherwise, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

Let us do the Math:

Out because of condition b - atleast 65%
Out because of condition c - atleast 10%
Out because of condition d - atleast 10%
Out because of condition e - atleast 10%

Summing Up - 95%

So, this essentially means that 95% of the salaried population that may fall under the 5 lakhs slab will not be able to use this new ruling and will eventually have to file their tax returns.

A point to note here is that - even this 5% seems to be a big number. Am not really sure if someone would fall under all these categories and still manage to not file their tax returns. The more realistic number would be around 1% of the population or even less.

Let's assume that there is indeed somebody (A hypothetical Situtation) who has no such investments and, therefore, no income other than from his salary and the interest on the bank account. Even then, he may not be able to fulfil the conditions for exemption. The notification says that the tax due on the interest income should have been paid and the income and the tax should be mentioned in Form 16 from the employer. The interest on bank account is credited on a half-yearly basis. The interest from October to March gets credited after March 31. You need to be a financial expert to correctly estimate the tax due on this income and pay the right amount. Considering the fact that banks pay interest on your daily end-of-day bank balance, the calculation part for even 3 months is going to be hectic and you can easily rule out the 6 months part. Without a tool that calculates your interest based on daily balances (and this is if you know your daily end of day balance) you cant really predict your bank interest income.

What is the final Verdict?

Given all the complicated conditions and the paperwork required to avail of the exemption and the possible repercussions of not filing your return, it looks like spending the 30-40 minutes online to file your tax returns is a far simpler option.

It will save you a lot and I mean a lot of time and effort and it is extremely easier than breaking your head about all these conditions...

Friday, July 8, 2011

The title sounds interesting, doesnt it? Yes, for all of you who thought that the Mukesh Ambani led Reliance Group is the most valuable group of companies in the stock market, you are in for a surprise.

Reliance Group is no longer the most valuable company in India. It is now currently in 3rd place after TATA Group in the no.1 spot and HDFC group in the no.2 spot. Read on to know more about how and why!!!

Before we begin: How do you term a company is the most Valuable Company in India?

You might be aware of the fact that, the BSE Sensex is made up of the 30 largest companies in India. Each company has a weightage in the index. The price movement of each of the 30 companies will affect the index based on their weightage. Let us say company A has a 5% weightage and another company B has 2.5%. This effectively means that the amount BSE Sensex will go up when company A goes up by 10 Rupees will be the same when company B goes up by 20 Rupees. This is because Company A has twice the weightage as Company B and hence B has to rise by twice the amount as A in order to have the same impact on the Index.

That being said, you may be able to guess where I am going. The Most Valuable company would be the one which has the highest weightage in the BSE Sensex.

What is the Most Valuable Company in India?

We are talking about the single most valuable or influential company in terms of Index movements. On a stand-alone basis, Reliance Industries Ltd (RIL) remains the most influential of the 30-stock BSE Sensex.

If Reliance Industries is the most influential company, how come Reliance Group isnt the Most Valuable Group?

If you had this question lingering in your mind, the answer is part of the question. Reliance Industries is indeed the single most valuable company, but as a group, there are other conglomerates that have more than one company that is part of the BSE Sensex and hence their total is much higher than Reliance.

Who are they and what are the numbers?

As per the information available with BSE, RIL's weight in Sensex is 10.73 per cent, which is bigger than any other stock on the index.

But, as a group, the TATA Groups weight is 11.17% and the HDFC Groups 12.1%

Now you can see why Reliance Group is in 3rd place behind the TATAs and the HDFC Group. You may ask me if there is no other company from Mukesh Ambani's Reliance group that is part of the Sensex. No, unfortunately his other companies arent part of the Index and hence the other groups with multiple companies whose individual weightages are less than RIL have overtaken Reliance group by sheer numbers.

What are the Individual Companies in TATA Group and HDFC Group that contribute to these numbers?

TATA Group:

TCS - 4.57%
TATA Stell - 2.66%
TATA Motors - 2.49%
TATA Power - 1.45%

Total TATA Group: 11.7%

HDFC Group:

HDFC Bank: 6.08%
HDFC Corp: 6.02%

Total HDFC Group: 12.1%

What about History?

Reliance Industries, by itslef has been in the no.1 spot for a very long time. But, because of various reasons, the contribution of RIL to the BSE Sensex has been significantly lesser than what it used to be a few months back. Because RIL has underperformed for so long, its weightage on the Sensex has been repeatedly reduced by BSE. About a year ago, RIL's weight was much higher at 14.16 per cent at the end of June 2010, which was biggest among all Sensex constituents, not only on a single company basis but also at the group level. But, now it is only 10.73%.

Monday, July 4, 2011

Finally, after years of misery, patience and desperation, the employee provident fund organization of India or the PF Office in short has done something commendable.

You will be asking me what it is. And when I give you the answer, you may say

“Are you Serious?”

Yes my friends. I am Serious.

The answer is

“Starting immediately, you can check your EPF Balance, Online and also get SMS Alerts**”

Isn’t that wonderful news? After years of misery for PF account holders who had no clue about their PF account balance, the PF Office has finally done the remarkable job of loading the data online and making it available for the citizens of India.

Select your PF Office Location and then follow the instructions outlined in the website and you should be able to view your PF Balance.

Disclaimer: I am currently employed overseas and do not have an EPF Account in India. So, I am not 100% sure of this indeed works. I read a new announcement in our of the finance groups I am a member of and searched the official EPF website to find the news to be true and hence this article.

If any one of you, can use the website and confirm if this actually works, it can be very useful to everyone. Please do not hesitate to leave a comment in this page if you were able to view your balance.

Friday, July 1, 2011

The title of this article kind of instills some curiosity into your mind. Doesn't it? The government has of late taken a lot of decisions reg. banks and finances in India. Some were good while many were bad news for us, the General Public. The latest in this series is the news related to usage of Bank ATMs. This news is both good and bad. Read on to find out what exactly the news is.

Before we Begin:

All the good & bad news mentioned in this article are in effect immediately starting 1st Junly 2011 (Today). So make sure you make a note of the same.

The Bad News Part:

The number of free transactions allowed at ATMs of banks other than where a customer holds the account would now also comprise non-financial transactions like balance inquiry.

Currently, customers are allowed a limited number of free transactions, generally five, for cash withdrawal and other financial transactions from other bank ATMs, while there is no cap on number of free non-financial transactions like balance inquiry or mini statement.

All this is set to change. RBI has now allowed the number of free transactions permitted per month at other bank ATMs to be inclusive of all types of transactions, financial or non-financial.

To add to the bad news, these free transactions would be available to only the savings bank account holders. So current account holders cannot withdraw cash free of charge in other bank ATMs.

Why is this Bad?

Well, this is bad because we have to go in search of our own bank ATMs if we need to withdraw money or check our balance if we have exhausted our quota of 5 free transactions per month. But, if you are someone who is willing to pay a small fee (like Rs. 20 for withdrawal and Rs. 10 for balance inquiry) then this news of no relevance or impact to you.

Note however that the numbers I have mentioned are just an example and you have to check with your own bank to find out the exact charges for using other bank ATMs.

Now for the Good News Part

As per an RBI directive, banks will have to credit the wrongly debited amount to the customer's account due to failed ATM transactions within seven days of the complaint, as against the current norm of 12 days.

Why is this Good?

If you are someone who uses the ATM frequently, you might have encountered the situation wherein, your account got debited of the amount you tried to withdraw but the machine never gave you any cash. In such a situation, you have to call up customer care and have them revert the transaction. The banks took their own sweet time to credit the money into our account. Though the RBI guideline was 12 days, the banks usually took even longer to return the funds into our account.

The RBI also states that, the banks would have to pay Rs. 100 per day beyond 7 working days, but only if the complaint is lodged within 30 days of the date of the transaction.

What should we do now?

Realistically speaking, lets hope that our ATM transactions are successful and we don't have to go through the trauma of calling up customer care and chasing them. Nonetheless, if the situation does arise, we must ensure that we raise the complaint to the bank within 30 days of the date of transaction in the ATM Machine.

Some More Good News:

In another measure to check any fraudulent use of bank accounts, the banks have also been told by RBI to provide SMS and email alerts to the customers for every transaction done on the bank account from tomorrow, as against the current practice of alerts for only select transactions beyond a certain amount or weekly/monthly alerts.

Why is this Good?

If banks provide us with updates every time there is a transaction on our account, we will be able to keep track of the funds in our account and identify/spot fraudulent transactions immediately. So, it is our responsibility to be vigilant and read all such alerts from our banks properly.

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often ...

Important Disclaimer

All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.